Posted:October 31, 2005

“No More Tuition”

As an entrepreneur who has now dealt with VCs for close to ten years, one phrase repeated more times than I care to recount has been, "The time for paying tuition is over; it’s time to show revenue multiples."

The first times I heard this mantra it went without question.  I know, as does everyone involved in a start-up, that revenue is goodness and messing around ("paying tuition") is badness.  I think, in general, that shareholder and investor impatience for a quick return on capital is a proper and laudable expectation.  If you’re in the big leagues, you need to either hit, field or pitch, or better still, multiples of these.

But neither technology nor markets are predictable.  Another statement frequently heard is "if you need to educate the market, your business model is wrong."  Another is "show me the way to $20 million annual revenues within the next XX months."

I ain’t a kid anymore, and I appreciate the demands for performance and results.  Starting up a business and spending other people’s money (not to mention my own and my family’s) to achieve returns is not for the fainthearted.  Fair enough.  And understood.

But the real disconnect is how to balance multiple factors.   I think I appreciate the pressures on VCs for returns.  I also understand their win some/lose some mentality.  (Actually, what I don’t understand is the acceptance of the high percentage rates of individual investment failures; something is not systematic and wrong here; but I digress.) 

But what I truly don’t understand is the application of mantras vs. a careful balance of positive and negative factors for a venture.  Excellent and innovative technology is often in search of proper applications and markets.  Excellent and innovative technology is often not initially mature for market acceptance.  Excellent and innovative technology is often misdirected by its founders until engagement with the market and customers helps refine features and product expressions.  Excellent and innovative technology is sometimes tasty cookie dough that  needs more time in the oven.

Presumably, as has been the case for my own ventures, the basis for investment has been excellent and innovative technology.  We all know the standard recipe of market-technolgy-management that sprinkles every high-tech VC Web site.  But, of course, and honestly and realistically, not all of these factors are in play when venture financing is sought.  And, let’s face it, if they were in play, there would not be an interest by the entrepeneurs to dilute their ownership.

I suppose, then, that all players in a venture-financed start-up are subject to various forms of willful or self-deception.  Entrrepreneurs and VCs alike believe they have all the answers.  And, of course, neither do. 

What I have come to learn is that it is the market that has the answers, and sometimes that takes time to figure out.  Good diligence at the front end is warranted — after all, there needs to be the basis of some excellent foundations — as are mechanisms for "feeding out the line" of venture dollars and claw back and other egregious ways to lay off risk because bad choices are often made.  But what should not be acceptable, should not be perpetuated, is the expectation as to WHEN these returns will be achieved. 

There is simply no avoiding that new, innovative and sexy technology may not be able to be precisely timed.  Rather than railing about not paying more tuiition, every VC that has done diligence and made a venture commitment should be cheering for more learning and more refinement.  Begin with good partial foundations (be they technology-management-market) and applaud the tuition of learning and refinement.  In the end, we never graduate; we hopefully progress to life-long learning.

"Longing gazes and worn out phrases won’t get you where you want to go.  No!"   –  Mamas and Papas   

Next up:  "The Myth of Superman"  

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As an entrepreneur who has now dealt with VCs for close to ten years, one phrase repeated more times than I care to recount has been, "The time for paying tuition is over; it’s time to show revenue multiples." The first times I heard this mantra it went without question.  I know, as does everyone […]

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